Supply Analysis

By
Mrs. N. Jayaprada
Supply
The quantities of a good or services that
the seller is willing and able to provide at a
price, at a given point of time.
Supply Function
Relation between supply and its determinants.
S = f {Px, C, T, G, W, E, N}
Product price
Cost of production
State of technology
Government policy of taxes and subsidies
Weather
Expectations of future prospects for prices, costs,
sales and state of economy in general
Number of firms

Law of supply
Other things remaining the
same, the higher the price
of a commodity, the greater
the supply vice versa.
Supply schedule
Price Supply per month
15 10000
20 15000
25 30000
30 45000
35 60000
s
s
Supply Curve
Limitations to Law of
Supply
Future prices
Agricultural output
Subsistence Farmers
State of technology
Types of supply
Joint supply
Two or more
commodities are
supplied together.
Composite supply
Single commodity is
supplied by several
sources.
Sheep

Mutton

Hides

Wool

Electricity

Energy

Gas

Oil

Supply and Demand
The Basics
Demand
Schedule
Price QTY
$3.50 320
$3.70 300
$3.90 280
$4.10 260
$4.30 240
$4.50 200
$4.70 160
$4.90 120
$5.10 80
$5.30 40

Supply
schedule
.
Price QTY

$3.50 40

$3.70 100

$3.90 160

$4.10 200

$4.30 240

$4.50 260

$4.70 280

$4.90 300

$5.10 320


What are three tasks that
the price system performs
for our economy?
1. Rationing of goods and services
2. Determination of wages.
3. Allocation of limited resources.
Laws of Supply and
Demand
What is Demand?
The willingness to buy a
good or service at all
prices
What is the law of
Demand?
If nothing else changes,
the quantity demand of a
good or service is greater
at lower prices than
higher.
What is Supply?
Supply is the quantity of a
good or service a firm is
willing to produce at all
prices.
What is the law of
Supply?
If nothing else changes,
firms are willing to supply
a greater quantity of good
or service at higher prices
than lower.

Demand Curve for
Xbox 360
P
r
i
c
e

p
e
r

X
B
o
x


H
G
F
E
C
D
D
B
A
Quantity Demanded
in Billions of Xboxes per Year
75 70 65 60 55 50 45 0
200
250
300
350
400
$450
$500
Copyright 2003 South-Western/Thomson Learning. All rights reserved.


P
r
i
c
e

p
e
r

X
b
o
x


Quantity Demanded in Billions of Xboxes per year
F
250
$350
D
0
D
0
C
D
1
D
1
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Movement along the curve versus
shifts in the Demand curve
Determinants of
Demand
Price of other goods ( substitute or
complementary)
Outlook (consumer expectation of future income
and prices)
Income (normal goods versus inferior goods)
Number of potential customers (pop.of market)
Taste (fads or fashions)
Supply Curve for
Xbox 360
S
S
a
b
c
e
f
g
h
90 80 70 60 50 40
$500
450
400
350
300
250
P
r
i
c
e

p
e
r

X
b
o
x

Quantity Supplied
in Billions of Xboxes per Year
30 0
200
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Movements along versus
Shifts of a Supply Curve
S
0
S
0
P
r
i
c
e

p
e
r

X
B
o
x


Quantity Supplied
in Billions of XBox per Year
c
f
S
1
S
1
310
$400
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Determinants of Supply
Productivity (Improvements in machines and production
processes of a good or service)
Inputs ( Change in the price of inputs required to produce
the good or service.)
Government Actions (Subsidies, Taxes and Regulations)

Technology (Improvements in machines and production
processes of a good or service)
Outputs ( Price changes in other products produced by
the firm)
Expectations (outlook of future prices and profits)
Size of Industry (Number of firms in the industry)
Equilibrium
Equilibrium: The condition that exists when
quantity supplied and quantity demanded are
equal. At equilibrium, there is no tendency for
price to change.
Shortage or excess demand: The condition that
exists when quantity demanded exceeds quantity
supplied at the current price.
Surplus or excess supply: The condition that
exists when quantity supplied exceeds quantity
demanded at the current price.
Supply-Demand
Market Equilibrium
D
D
G
A
S
S
90 80 70 60 50 40
$500
450
400
350
300
250
P
r
i
c
e

p
e
r


x
b
o
x

3
6
0


Quantity
in Billions of Xbox 360 per Year
30 0
200
E
g
a
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Excess Demand
Excess demand, or
shortage, is the
condition that exists
when quantity
demanded exceeds
quantity supplied at the
current price.
When quantity demanded
exceeds quantity supplied,
price tends to rise until
equilibrium is restored.
Excess Supply
Excess supply, or
surplus, is the condition
that exists when quantity
supplied exceeds
quantity demanded at
the current price.
When quantity supplied
exceeds quantity demanded,
price tends to fall until
equilibrium is restored.
Changes in
Equilibrium (IRDL)
Increase in demand leads
to higher equilibrium price
and higher equilibrium
quantity.
Increase in supply leads
to lower equilibrium price
and higher equilibrium
quantity.
Changes in
Equilibrium (IRDL)
Decrease in demand
demand leads to lower
price and lower quantity
exchanged.
Decrease in supply
leads to higher price and
lower quantity
exchanged.